Shadow Money Magic: Five Easy Steps That Let You Play Big in Politics, Hide Your Donors and Game the IRS – Step 3

A CENTER FOR RESPONSIVE POLITICS REPORTPart Three (view earlier installments)

Step 3: Sharing is Caring

In the first two parts of our report, we showed that anyone seeking to build a secretly funded political group that can make some waves in elections has a ready option in the 501(c)(4) section of the tax code. Groups formed under its provisions — officially, “social welfare” organizations — are supposed to keep their political spending to less than half of their total expenditures (an unofficial, but widely recogized rule), which is easier than it might sound due in part to the IRS’ apparently narrow interpretation of what qualifies as political.

But once an organization, awash with money, has exhausted most of its own political spending options, it can turn to another maneuver: It can put on a Santa suit and dole out millions in grants to groups with similar agendas — as several of the politically active nonprofits in the Crossroads-Center to Protect Patient Rights network have done. Then the recipients can use the money to buy ads attacking politicians that both groups don’t like.

The groups making the gifts thus can exceed — de facto — the 49 percent limit.

Members of the network together spent $77 million on the 2010 elections, according to their FEC reports. More than $66 million of that was spent on races in which three or more of the groups ran ads. Almost all of that money was used to oppose candidates for office, and two-thirds went towards directly and explicitly calling on voters not to elect certain candidates.

Take the Pennsylvania Senate race between Democrat Joe Sestak and Republican Pat Toomey. In that 2010 barnburner, seven members of the Crossroads-CPPR network spent a total of $2.6 million to help Toomey, accounting for 18 percent of all non-party outside spending in the race. The network’s top three spenders in the contest — the Republican Jewish Coalition, Americans for Tax Reform and Crossroads GPS — all gave money to or received it from one another that year, in the millions of dollars.

Here’s how the RJC says it spent about $1 million in Pennsylvania — an appeal to fear that FactCheck.org found fault with:

Americans for Tax Reform, in particular, illustrates how the “money churn” between groups can work. Founded in 1985, ATR had never filed a single report with the FEC prior to 2010. Its tax filings show that its annual revenue had rarely fluctuated far from the $4 million range. Yet suddenly, in the 2010 midterm elections, ATR told the FEC it spent $4.2 million on ads attacking congressional candidates. Its tax forms, filed with the IRS nearly a year after the election, revealed a spike in revenues of more than $8 million.

Crossroads’ $4 million grant to ATR was one of 12 grants, totaling $15.9 million, that it handed out in 2010. Had the money its recipients spent on politics counted against Crossroads GPS’ political spending, it easily would have caused the group to exceed its 49 percent limit.

As for CPPR, the “shadow money mailbox,” it never spent funds on direct advocacy, so hasn’t been at risk of transgressing IRS political spending limits — if one buys the argument that sending grants totaling tens of millions of dollars to other 501(c)(4) groups (such as American Future Fund, which received $11.7 million from CPPR in 2010) is legitimate “social welfare” spending. If the group had given the same amount of money to super PACs, which in many cases run the same types of ads, its tax exempt status likely would have been in serious jeopardy.

Another example: The Republican Jewish Coalition diligently churned the money it oversaw. In 2010, the RJC’s total expenses skyrocketed more than fivefold over those of the previous year, to more than $12 million. Little is known for sure about its funding sources, other than two modest grants from Crossroads GPS and the American Action Network — $250,000 and $500,000 respectively.

“The best practice would be for [the donor groups] to give the money specifically earmarked for the other organization’s social welfare activities,” said Ellen Aprill, a tax law professor at Loyola University. In reality, though, most of the grants are given for “general support” or some similarly broad purpose.

Because there’s no rule barring coordination between nonprofits — as long as they don’t coordinate with any candidate that would benefit — the groups involved in the Crossroads-CPPR network, which invested in 252 races in 2010, can, and sometimes do, strategize with one another about how, when and where they will spend their money for maximum impact. Some have been regulars at meetings of the Weaver Terrace Group, named for the street on which Karl Rove’s house — where the group used to convene — sat.

One measure of the network’s impact: In the 10 House races in which its members spent the most money in 2010, the groups’ outlays made up an average of 64 percent of all nonparty outside spending.

And in the top 10 most expensive races of 2010, House and Senate, spending by the network made up about one-fifth of the total spending.

In Step 4 of our series tomorrow, we’ll look at what politically active nonprofits do in non-election years (answer: not much, which is telling in itself).

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